Week 6 Macroeconomics

1 (b ) An increase the quantity of money in circulation . This leads to inflation , which is an increase in money supply in the country , which will end up in increase in prices of commodities . Inflation is taken to mean a runway inflation . At such periods the excessive creation of money result in huge increases in prices . Inflation affects many things among them the cost of living due to reduction in the purchasing power of the money (c ) An increase in the labor force participation rate may cause the price to increase . This is

due to labor unions participation in bargaining in increase in salaries and wages of employees . As they negotiate for high salaries , there would be more money in supply , which later leads to high price of goods (e ) Arise in real incomes of countries that are key trading partners of the nation . This may make the nation to increase their commodities because they will sell them to their customers of other countries they are participating with because they are the trading partners and they might end up buying from them . This affects the price in the nation , in that it increases and makes people of that countries incur high cost of living

2 (a ) When people invest , this will hold up money and there would be less money in supply hence will make the current equilibrium interest rate to increase (b ) The current equilibrium GDP will reduce because much money is used in investment sector , which will reduce the production of goods and services in the country (c ) As people invest , there is an increase in the purchase of goods for purpose of further production as opposed to immediate consumption . This will increase equilibrium employment level because more people will be employed in various sectors of the economy to further the production of goods purchased (d ) Investment will reduce the current equilibrium saving level in that when one invests for example in buying shares in the stock exchange , he will have to withdraw the money he had in his or her account so that he can use the money in investing in those shares hence the savings will reduce as he or she will increase the investments (e ) The future equilibrium real GDP will increase in future because after investment people will start earning dividends or profits from their investments . Others may decide to sell the investments when their value has risen hence more money will be there in the country hence an increase in GDP

3 (a ) Classical theory : This theory states that savings is a function of interest rates and not a function of income . The annual percentage changes in these variables are closely related except for the one of Gross Domestic Product price index that has the least percentage change compared to the others

3 (b ) Keynesian theory : According to this theory the value of money is expressed in terms of interest rate and depend on demand and supply of money .The annual percentage variables...